Opinion: What Will It Take for New Jersey Healthcare to Get Better?

Well-publicized changes are in the works, but thus far they remain patches on a broken system

Joel C. Cantor

The data on New Jersey healthcare has long looked pretty bad. We have among the highest health-services spending per resident among the states (and the U.S. has roughly double the average per capita spending of other developed nations).

One reason for our high cost is the way we use services. Examining Medicare data, the Dartmouth Atlas of Health Care shows that New Jersey is an outlier in the intensity of hospital and specialist-services utilization compared with other states.

For example, 57 percent of Medicare beneficiaries who died in 2010 were seen by 10 or more different physicians during the last six months of life, compared with 48 percent in Pennsylvania and 42 percent nationally. In 2007, one-in-four Medicare decedents spent seven or more days in intensive care during their terminal six months, more than twice the intensive care rate in New York state. Other Dartmouth indicators for patients who have chronic illnesses, but are not terminally ill tell the same story.

Moreover, Dartmouth and other researchers have consistently shown that local hospital markets with a higher intensity of utilization tend not to have higher patient satisfaction or better clinical outcomes. On the contrary, higher intensity is often linked to lower satisfaction and outcomes. While these studies are limited to patients in traditional Medicare and are subject to methodological critiques, the results are consistent and convincing over many studies.

Although it is hard to say why overutilization appears to be worse in New Jersey than elsewhere, it is not tough to see why high rates of avoidable use and cost are hallmarks of U.S. healthcare. Fee-for-service payment has long been used not just in Medicare, but in Medicaid and private insurance as well. In spite of the growth of managed care, most providers are still paid on a piece rate. More specialty visits and more ICU stays equate to more income for providers, even if there is little or no health benefit to the extra care. This incentive has led to expanding definitions of “medical necessity” for myriad medical procedures.

Prices paid for specialty and procedure-based care have been high relative to the more “cognitive” specialties such as family practice, pediatrics, and general internal medicine, skewing care patterns toward the kind of intensity shown in the Dartmouth statistics. Recent trends toward lower provider-fee schedules has probably made matters worse, encouraging providers to cover rising practice expenses and maintain incomes by increasing service volume.

But the tide of excessive utilization of medical services of dubious benefit may be beginning to turn. The Medicaid expansion, healthcare.gov implementation, and coverage tax credits have dominated news about Affordable Care Act, yet the ACA rollout also includes numerous opportunities to shift healthcare away from the traditional fee-for-service cottage industry that it has been for decades. Some of those opportunities are starting to yield results.

Another ACA program, the Medicare Readmission Reduction Program, is also shifting incentives. Under this program, hospitals are penalized if too many of their Medicare patients return to the hospital within 30 days following discharge for heart attack, heart failure, or pneumonia. Not surprisingly, New Jersey has been an outlier in this program, with all but two hospitals being hit with penalties. In coming years more conditions will be tracked for readmissions and penalties will be ramped up.

Programs like ACOs and readmission penalties are changing the business model in healthcare. Years ago, my colleagues and I evaluated two foundation-sponsored initiatives in New Jersey to reduce readmissions for heart failure, finding considerable promise for quality of care improvement and cost reduction. But these initiatives were unsustainable. It made no business sense for hospitals to pay advance-practice nurses to work with very complex patients to make sure they could manage their conditions at home after discharge. In fact, hospitals were penalized for success because they would lose the fees from readmissions that were averted. Today, hospitals have strong financial incentives to avoid penalties and earn ACO bonuses from offering better support for care transitions after a health crisis.

It is too early to tell whether ACOs, readmission penalties, and the like will create the sea change needed. Fee-for-service payment is still the foundation of healthcare financing, and as exciting as these new strategies are, they are essentially patches on a broken system. Other states, including Massachusetts, are experimenting with bolder strategies to change the financing paradigm.

New Jersey is also moving forward with programs like its innovative Medicaid ACO initiative and other Medicaid reforms. We do not know how big a dose of health finance and delivery reform will be needed, or which kinds of strategies will most sustainably reduce avoidable utilization and cost. It is important to learn from the ongoing experiments and move rapidly to embrace strategies that work and be prepared to develop new ideas when they don’t.

Joel C. Cantor is the director of the Center for State Health Policy and professor of public policy at Rutgers University. He has authored numerous studies of health insurance regulatory policy, healthcare delivery system performance, and access to care for low-income and minority populations. He serves frequently as an advisor on health policy matters to New Jersey state government. The views expressed in this essay are solely those of the author and are not endorsed by funders of the Center for State Health Policy.